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Law Society response to European Commission's Green Paper on European Contract Law
Practical Law UK Legal Update 9-504-7050 (Approx. 6 pages)
Law Society response to European Commission's Green Paper on European Contract Law
by PLC Commercial
| Published on 03 Feb 2011 • European Union, United Kingdom |
The Law Society of England and Wales has published its response to the European Commission's Green Paper on developing a European contract law. (free access)
Speedread
The Law Society has published its response to the European Commission's Green Paper on European Contract Law, which consulted on various proposals for developing a European contract law instrument (see Legal update, European Commission publishes Green Paper on developing a European contract law). Out of the seven options proposed by the Commission, the Law Society is in favour of developing a non-binding "toolbox" that could be used to improve the quality and consistency of European legislation (Option 2). It does not consider that a need for an optional instrument of European contract law (Option 4) has been established, and actively opposes its introduction. As an alternative, it proposes the creation of EU-endorsed optional standard terms and conditions for use in cross-border contracts. This, it argues, would be a pragmatic and proportionate response to the concerns raised by the Commission in the Green Paper, and would be deliverable more quickly and be less costly than an optional instrument. The Law Society is currently developing this approach in greater detail. For general information about the European Commission's proposal for a European contract law, see the PLC Commercial legislation tracker.
European Commission Green Paper on developing a European contract law
In July 2010, the European Commission published a Green Paper consulting on various proposals for developing a European contract law (see Legal update, European Commission publishes Green Paper on developing a European contract law). The Commission believes that differences in member states' national contract laws inhibit cross-border trade within the EU Single Market, and that a European contract law instrument will remove (or reduce) these barriers. The Green Paper is the latest in a line of EU initiatives promoting a European contract law dating back to 1989.
The Green Paper suggests a number of forms that a European contract law instrument could take, which are set out in Legal update, European Parliament publishes draft response to European Commission's Green Paper on European Contract Law.
Law Society response
The Law Society has published its response to the Green Paper. Like many other UK respondents, the Law Society is sceptical about the need for an optional instrument of European contract law (OI) (Option 4). It actively opposes the introduction of such an instrument, and of any mandatory contract law instrument (Options 5-7). Instead, the Law Society proposes the creation of EU-endorsed optional standard terms and conditions for use in cross-border contracts. This, it argues, would be a pragmatic and proportionate response to the concerns raised by the Commission in the Green Paper, and would be deliverable more quickly and be less costly than an instrument. The Law Society is currently developing this approach in greater detail.
The need for intervention not established
The Law Society does not agree that the need for an OI has been demonstrated and consequently opposes its introduction.
The Law Society agrees that increasing cross-border sales, especially to end-consumers, would assist in the integration of the internal market. However, it does not agree that the mere diversity of national contract laws in fact impedes such trade. It believes that many of the barriers to cross-border trade are practical and procedural. In the case of consumers, it is the problem of obtaining practical redress when a problem arises in a cross-border contract that is believed to be the key issue. In the same way, for businesses, the Law Society believes that some of the greatest barriers to entering the markets of other member states relate to the different court processes (and fears as to whether proceedings will be fair and efficient), regulatory hurdles, means of seeking redress and problems relating to enforcement mechanisms.
The diversity of contract laws does mean that businesses may wish to take legal advice, but in-house lawyers that the Law Society has consulted are unconvinced that an instrument of European contract law would be of assistance, because it would lack any established jurisprudence and it would not be possible to ensure uniform interpretation of a new instrument across the member states and so national divergences would continue. Practitioners note that, in practice, when advising businesses on cross-border transactions, the underlying contract law does not differ greatly between member states.
The Law Society notes that the laws in relation to other topics, for example, advertising, packaging requirements, product liability and non-contractual representations, are also relevant and equally important. For business, the uncertainty about these requirements greatly increases the risk of making overseas sales.
For business-to-consumer contracts, practitioners note that businesses' fear of selling into another member state often relates to contracts being subject to the consumer protection offered to consumers by their home member state laws. An OI would only enable sellers to know the consumer protection rules across the member states if these were harmonised or if all such transactions were governed by the 28th regime.
How optional would the optional instrument be?
The Law Society is concerned that it is unclear whether all parties to a contract would have to agree that the “optional instrument” should be used or whether, if all the consumers who were party to the contract wanted to use the “optional instrument”, the business party or parties would be forced to use this, or vice versa.
The Law Society considers that an optional instrument must be truly optional. There should, for example, be no compulsion on businesses to offer it as an option when dealing with consumers or others across the EU’s internal borders. (In other words, contracting parties would have to "opt-in" to using the instrument, rather than "opt-out".) If there were any compulsion on businesses to offer this option to consumers, it would discourage, rather than encourage, cross-border trade because it would impose an additional cost on the conduct of that trade.
On the other hand, from the point of view of consumers, there might a concern as to inequality of bargaining power if both they and businesses were free to agree to opt either for the law of a Member State legal system or the “optional instrument”, as it is likely that businesses would be better informed as to the ramifications of choosing the different regimes as governing laws. It is possible that consumers could be disadvantaged by the proposal.
Further analysis required
The Law Society believes that there is a need for further analysis of the legal barriers to cross-border trade. It also believes that, given that discussions in the European institutions are focusing on an OI, there is an urgent need for an impact assessment of the key options in the Green Paper and that this must be broad and consider the different options outlined.
Lack of practitioner input should be remedied
The Law Society is concerned that the group of experts convened by the European Commission is mainly comprised of academics and would welcome the direct involvement of common law practitioners in the drafting process.
Lack of certainty
While the Law Society acknowledges that there is always a level of inherent uncertainty in new legislation, it believes that an OI would cause particular problems because there would be uncertainty as to the meaning of the new instrument and its interpretation, which would evolve over time, and also uncertainty as to the scope of its application.
It considers it unclear how the Court of Justice (both in regard to its role within the Treaties and current capabilities) would be able to create jurisprudence of a commercial nature, and that this raises concerns because any contract law is closely bound up with the mechanism for its enforcement through the courts.
Given that no need has been evidenced for a new instrument, this seems a disproportionately large amount of uncertainty for businesses and consumers, and the Law Society thinks that the result of this is likely to be that the new instrument would not be used much in practice. Instead, the Law Society would favour legislative initiatives to improve practical means of redress available for businesses and consumers when engaging in cross-border contracts, which it believes would positively improve the functioning of the internal market. The Law Society would also support the introduction of some optional standard form terms and conditions (see below).
In regard to the scope of an OI, the Law Society considers that confusion could be caused if some issues in an agreement fall outside the subject matter covered. For example, if, as seems likely, the OI covered the sale of goods, a contract which covered the supply of both goods and services would still need to be governed by the contract law of a member state. Many cross-border transactions also involve additional areas of law, for example, the law of property and, if something goes wrong, the law of tort. These would still need to be governed by the laws of a member state.
Questions over the EU's powers to make an optional instrument
The Law Society considers it unclear whether there is a legal basis under the Treaties to create an OI. In order to establish this, the Commission must provide a clear justification for any proposal it makes, demonstrating that different contract laws do genuinely obstruct the proper functioning of the internal market, and that any obstructions apparently caused by different contract laws are not in fact due to other causes. Any solution proposed to address proven difficulties would need to address those difficulties in a proportionate manner and in accordance with the principle of subsidiarity.
Other respondents have also raised the EU's constitutional competence as an issue (see Legal update, Bar Council response to European Commission's Green Paper on European Contract Law).
Burden on the ECJ
The Law Society considers that the only body that would be able to announce authoritatively on the meaning of an OI would be the Court of Justice. This is by nature a constitutional court, unable to substitute its own decision for that of a national court or EU regulatory body. The cost of expanding the Court of Justice’s role and workload would be considerable. In general, its judges do not have commercial experience and parties encounter long delays even with its current workload.
The Law Society believes this arrangement would lead to a divergence in the application of a new instrument between member states as many parties would not elect to appeal to the higher courts in disputes. (The suggestion that there could be a database of decisions across the EU is interesting, but would not have the legal effect of decisions by senior courts or the Court of Justice. There would be no means of knowing which one of conflicting interpretations was the correct one.)
Need to retrain the legal professions and judiciary
The legal professions and judiciary across the member states would need to be re-trained if an OI were adopted. The Law Society notes that, without further information on the content or scope of a new instrument, it is impossible to give an accurate calculation of the training costs it would create.
In addition, as contract law is a core subject studied as part of a law degree, there would be further costs in training sufficient academics and, for students, there would be an impact on the other topics they were able to study if this initiative became compulsory.
Law Society proposes creation of EU-endorsed optional standard terms and conditions for use in cross-border contracts
As an alternative to a contract law instrument, the Law Society proposes the creation of EU-endorsed optional standard terms and conditions for use in cross-border contracts. This, it believes, would bring many of the benefits that the Commission argues an OI would deliver, but without the uncertainties and practical difficulties associated with that proposal. It also argues that such an initiative would be more quickly achievable and cost less than a contract law instrument. The Law Society is currently developing this approach in greater detail.
Further reading
For further information on the Green Paper and links to other relevant materials, including other responses to the Green Paper, see the PLC Commercial legislation tracker.